The Importance of Good Regulation

Werner Bijkerk Head of Research, IOSCO

Deutscher Derivate Tag Deutscher Derivaten Verband Frankfurt, 6 October 2014

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Disclaimer The views and opinions presented in this presentation are of the presenter only and do not

necessarily reflect the views and opinions of IOSCO or its individual members.

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Agenda

1. Why does regulation matter? 2. How does society see us, regulators? 3. How do regulators approach you, market participants? 4. Global markets and regulation: IOSCO´s role

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Agenda

1. Why does regulation matter? 2. How does society see us, regulators? 3. How do regulators approach you, market participants? 4. Global markets and regulation: IOSCO´s role

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Why does regulation matter?

If you perform harmful or illegal activities, rules provide the basis for punitive action:

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Why does regulation matter?

…Or a national scandal…with billions of compensation, class actions, and more rules and regulatory powers:

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Why does regulation matter?

Interested stakeholders:

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• Firms • Participants • Investors • The State • Politicians • Regulators • Press • All

• Capital at low cost, reputation • Level playing field, no illegal players • Understand and get good products • Execution of laws, budget • No scandals, cost • Salary, social esteem • Scandals, sleeping regulator • It´s our economy

Agenda

1. Why does regulation matter? 2. How does society see us, regulators? 3. How do regulators approach you, market participants? 4. Global markets and regulation: IOSCO´s role

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How does society see us, regulators?

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Agenda

1. Why does regulation matter? 2. How does society see us, regulators? 3. How do regulators approach you, market participants? 4. Global markets and regulation: IOSCO´s role

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Regulatory focus

Illegal behavior Harmful behavior

Detailed administrative

rule Churning Strong fee driven

culture

+ Law is precise basis + Accountability relativamente simple in

short run - Law is slow and falible instrument - Do you attack big problems?

+ Regulacion focused on fixing big problems + Better accountability in long run - What are the applicable rules? - Risk of getting too far away from the law

Advantages and disadvantages of focus on illegal behavior

Advantages and disadvantages of focus on harmful behavior

Rules or Principles Advantages

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• Immediate compliance • Strong defence against litigation • Strong base and sense of mission • Internal cohesion • Consistent • Prevention of reg capture • Punishes benefits by competitive

advantages of non-compliance • Scale effects in case of huge

number of regulated entities

• Minimize opposition in long term

• Reduces compliance burden allowing tailored responses

• Reaches further with fewer resources

• Increases likelihood of agency survival

Regulatory instruments

Agenda

1. Why does regulation matter? 2. How does society see us, regulators? 3. How do regulators approach you, market participants? 4. Global markets and regulation: IOSCO´s role

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IOSCO’ s Mission IOSCO is the global standard setter for securities regulators, with

members from 120 jurisdictions It exists:

• To protect investors

• To ensure that markets are fair, efficient and transparent

• To reduce systemic risk

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IOSCO’ s Mission (2) IOSCO members agree

• To cooperate in developing, implementing and promoting

adherence to internationally recognized and consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risk;

• To enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and

• To exchange in formation at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.

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IOSCO in the global architecture of the reform agenda

IOSCO

• Securities markets regulation

Other Standard Setters

• Banking • Insurance • Payments and

Clearing

FSB

• Financial stability

• Coordination

IMF and World Bank

• Global macro-economic focus

• Implementation of standards and peer reviews

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G20 Leadership

• Connection to political process • Global credibility

IOSCO work process

Identification and analysis of emerging risks

Policy development

Implementation: monitoring,

evaluation, capacity building and market

development

Prioritization and inclusiveness

Feedback

Prioritization and inclusiveness

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Strategic role of Research in IOSCO Research should: • Signal timely big risks • Provide practical ideas for solutions • Help targeting the strategic and current course of

supervisory and policy agendas

And, as a result, helps making regulation based on evidence and timely.

Research provides arguments to the stakeholders why regulation is needed.

IOSCO Risk Outlook Main Risks 1. The return of leverage in products and investments can destabilize

markets when interest rates go up. 2. Capital flow volatility in EM takes place in better developed

markets of today, but is harming economic growth already. IOSCO will take a pro-active role in developing market structures.

3. Big changes in derivatives markets move risks around but don´t take them away. Pooling them in CCPs make CCPs too important to fail.

4. At the moment we are unable to assess the impact of the changes and challenges of the collateral space and we need much more disclosure.

5. Governance of big financial firms is at risk. Firms cannot afford weak risk management, compliance and internal control. 25

More Risks 1. Cyber attacks getting more sophisticated and become a threat to

the functioning of critical infrastructure. 2. Crowdfunding grows exponentially. Tremendous opportunities for

small and medium enterprises, many risks for investors. 3. Corporate bond markets exuberance in issuance, low rates, thin

secondary market liquidity. Risks to investors and challenges to improve capital formation role even further.

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